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Why Did Argentina's Currency Board Collapse?

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  • Francois J. Gurtner
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    Abstract

    This paper sheds light on the risks associated with currency board arrangements, referring to the severe liquidity crisis that emerged in Argentina in November 2000. The inability of the Argentinean economy to grow because of an overvalued peso and the massive borrowing needs of the government in the context of rapidly rising borrowing costs seriously undermined the credibility of the fixed-exchange rate regime. Given the widespread dollarisation of the financial sector on the liability side, Argentina had arguably little choice but to stick to the currency board. A series of measures aimed at reviving growth were implemented but with no signs of upturn in demand, increasingly distrustful international investors and growing social unrest, the country was forced into default in December 2001, putting an abrupt end to its decade long experiment with hard money. This study shows that with rigid labour markets, a lack of fiscal discipline and the absence of a natural anchor currency, Argentina was never a strong candidate for a hard peg. Copyright Blackwell Publishing Ltd 2004.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal The World Economy.

    Volume (Year): 27 (2004)
    Issue (Month): 5 (05)
    Pages: 679-697

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    Handle: RePEc:bla:worlde:v:27:y:2004:i:5:p:679-697

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    Cited by:
    1. Kathryn M.E. Dominguez & Linda L. Tesar, 2005. "International Borrowing and Macroeconomic Performance in Argentina," NBER Working Papers 11353, National Bureau of Economic Research, Inc.
    2. Busse, Matthias & Hefeker, Carsten & Koopmann, Georg, 2006. "Between two poles: A dual currency board for Mercosur," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 17(3), pages 349-362, December.

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